New Ways States Are Taxing You in 2023
When April 15 rolls around every year, you may primarily be concerned with how much money you owe the federal government rather than your state. In most cases, state tax liabilities are much smaller than federal ones, and in eight states, there are no income taxes levied at all. But two of the four most-populated states have top tax rates ranging from 10.9% to 13.3%, meaning state tax rates do affect a large number of Americans. Here’s a look at some of the most important changes in state tax laws taking effect on Jan. 1, 2023.
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Notable Changes in the Most Populated States
California and New York are often discussed in terms of taxes because on a relative basis, they are quite high. New York’s top individual income tax rate hits 10.9%, while California’s highest bracket is a whopping 13.3%, highest in the nation. All in all, nearly 61 million residents live in these two states, or about 18% of the country’s entire population of 334 million. This means that when tax changes are made in these two states, they affect nearly one-fifth of all Americans.
For 2023, New York is actually reducing its tax rate on certain incomes, dropping its 6.2% bracket rate to 6% and its 5.85% rate to 5.5%.
California’s tax law changes for 2023 only affect cannabis retailers — who now have to pay taxes instead of distributors — and lithium extractors, who face a new tax.
Income Tax Rate Reductions
New York isn’t the only state reducing tax rates on at least some of its residents. Ten additional states — Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire and North Carolina — also lowered certain tax rates and/or changed from graduated income tax rates to a flat tax on New Year’s Day.
For example, Arizona implemented a new 2.5% flat-tax structure on Jan. 1, 2023, one year earlier than anticipated. Mississippi is converting to a flat tax rate of 5%, which is scheduled to drop to 4% in 2026. Idaho also converted to a flat tax from graduated rates, with its new tax rate of 5.8% coming in a touch under its previous top marginal rate of 6%.
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Increase in Tax Rates
On the other side of the coin, one state — Massachusetts — actually increased some of its taxes on Jan. 1. However, this tax increase is being colloquially referred to as the “millionaire’s tax,” as it imposes a new surcharge of 4% — bringing the total rate to 9% — on taxable incomes in excess of $1 million.
New Exemptions of Retirement or Military Income From Taxation
Those with retirement income or military pensions in five states — Alabama, Delaware, Iowa, Rhode Island and Nebraska — will see a full or partial exemption of that income from taxation starting in tax year 2023.
These are not the only states that provide these tax exemptions, just the new ones for 2023. In fact, 26 states now exempt military income from taxation, three states exempt a portion of retirement income and eight states have no income tax whatsoever.
Expanded Earned Income Tax Credits
Hawaii has made its earned income tax credit refundable in 2023. Illinois boosted the amount of its EITC to 20% of the federal level for taxpayers between 18 and 25 or 65 and older, in addition to ITIN filers.
Changes in Sales and Use Taxes
For many states — particularly those with no income tax — sales and use taxes provide a significant amount of revenue. They also affect the bulk of a state’s population, as sales and use taxes affect all residents who consume goods and services.
For 2023, Virginia reduced sales tax on groceries to 1%, while Kansas dropped its food sales tax to 4% from 6.5%.
Kentucky greatly extended the reach of its 6% sales tax for 2023. Specifically, the state sales tax will now apply to more than 30 individual service categories, from photography and marketing services to personal training and social event planning.
New legislation in Missouri allows the state to collect sales tax from online sellers and retailers that deliver more than $100,000 in tangible goods to state consumers annually.
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